Not-So-Adventurous Venture Capital

According to the Center for Women's Business Research, the number of firms run by women grew at nearly twice the rate of all U.S. firms from 1997 to 2004. But a new study released this month by VentureOne, a unit of Dow Jones, shows that the number of women-owned or women-run businesses backed by venture capitalists has been on a slippery decline since 2002.

To be clear, the number of venture-capital-backed, female-owned firms wasn't very big to begin with. In 2002, only 7.55% of all venture-backed companies had women as chief executives. But in the first half of 2006, that number fell to 3.7% (the lowest percentage since 1997). The number of venture-backed companies with women in top management bottomed out at 29.7%--versus 34.8% in 2002.

The question, then: Is venture capital less enamored of businesses run by women?

One theory: After the dot-com bust in 2000 and the Sept. 11, 2001, terrorist attacks, venture capitalists shied away from backing all but the most experienced serial entrepreneurs, of which only a few were women, says Jennifer MacFarlane, chief executive officer of the Women's Technology Cluster, a San Francisco-based nonprofit that supports women entrepreneurs. Meanwhile, she adds, more women than men chose to trade the riskier startup world for the security of larger, more established companies--or simply more time with family.

That would explain a short-term shift in the numbers. Yet while the venture capital cycle has since risen out of its doldrums in 2004, women's numbers have continued to lag. "Hopefully, we're hitting rock bottom," says MacFarlane.

Part of the problem is that venture capital remains a very clubby world. Women who didn't make key connections back in the go-go '90s have a harder time securing startup capital today, says Amy Millman, president of Springboard Enterprises, which helps match women-run startups with investors.

There is also the matter of skills. With each passing year, fewer women than men are gravitating toward engineering--the very discipline that leads to the kinds of technological innovations VCs are looking for. In 2005, women made up only 17.5% of students enrolled in undergraduate engineering programs in the U.S., according to the American Society for Engineering Education. "If innovations are coming out of engineering schools, women just aren't there," says Candida Brush, Babson College's Paul T. Babson Chair in Entrepreneurship.

How to reverse the trend? An increase in female investors might help, says Brush. If venture capital indeed runs on relationships, female investors may be more willing to invest in female entrepreneurs. One shining light: VC giant Kleiner Perkins Caufield and Byers, which has been adding more female firepower in recent years. Today, eight of its 22 partners are women.